Plant Location

Praveen D Nagarajan
 Location Planning

Every firm must use location planning techniques.

There are many options for location planning.
Corporations choose from expanding an existing location, shutting down one
location and moving to another, adding new locations while retaining existing
facilities.
There are a variety of methods used to decide the best location or alternatives for
the corporation.
Methods such as identifying the country, general region, small number of
community alternatives and site alternatives.
Several factors that influence location positioning include the location of raw materials, proximity to
the market, climate, and culture.
Models for evaluating whether a location is best for an organization consist of
The cost-profit analysis for locations,
The center of gravity model,
The transportation model &
Factor rating Method.
If you are planning on moving or acquiring a new facility, there are many factors to consider:
The size,
The geographic area,
The Culture,
Transportation costs and others.

The main factors that affect location decisions include regional factors, community considerations,
and site-related factors.

Community factors consist of quality of life, services, attitudes, taxes, environmental regulations,
utilities, and development support.
EVALUATING LOCATION ALTERNATIVES 
There are three specific analytical techniques available to aid in evaluating location alternatives:

Location Cost-Volume-Profit Analysis:

The Cost-Volume-Profit (CVP) Analysis can be represented either mathematically or graphically.
It involves three steps:

1) For each location alternative, determine the fixed and variable costs,
2) For all locations, plot the total-cost lines on the same graph, and
3) Use the lines to determine which alternatives will have the highest and lowest total costs for expected levels of output.

Additionally, there are four assumptions one must keep in mind when using this method:
Fixed costs are constant.
Variable costs are linear.
Required level of output can be closely estimated.
There is only one product involved.

Total cost = FC + v(Q)

where FC=Fixed Cost, v=Variable Cost per Unit, Q=Number of Units
Factor Rating

This method involves qualitative and quantitative inputs, and evaluates alternatives based on comparison
after establishing a composite value for each alternative.

Factor Rating consists of six steps:

Determine relevant and important factors.
Assign a weight to each factor, with all weights totaling 100.
Determine common scale for all factors, usually 1-5 or 1-10
Score each alternative.
Adjust score using weights (multiply factor weight by score factor); add up scores for each alternative.
The alternative with the highest score is considered the best option.

Minimum scores may be established to set a particular standard, though this is not necessary.
 Factor Rating Method
Rating
Variables Weightage Kanpur Chennai Bangalore
1 Close Proximity to Market 5 1 5 5 25 4 20
2 Close Proximity to raw material 20 5 100 1 20 3 60
3 Transportation 15 3 45 3 45 2 30
4 Power supply 10 2 20 4 40 1 10
5 Govt. Policy 15 4 60 3 45 5 75
6 Skilled Labour 15 1 15 2 30 2 30
7 Cheap Land 20 3 60 1 20 3 60
Total 100 305 225 285
Center of Gravity Method

This technique is used in determining the location of a facility which will either reduce travel time or
lower shipping costs.
Distribution cost is seen as a linear function of the distance and quantity shipped.
The Center of Gravity Method involves the use of a visual map and a coordinate system; the
coordinate points being treated as the set of numerical values when calculating averages.
If the quantities shipped to each location are equal ,
the center of gravity is found by taking the averages of the x and y coordinates;
if the quantities shipped to each location are different, a weighted average must be applied.
 Centre of Gravity Method
Store Qty of Products
X-Coordinate Y - Coordinate xiLi yiLi
Location Sold - Li
A 125 100 1250 156250 125000
B 250 75 3000 750000 225000
C 450 300 2750 1237500 825000
D 200 350 1500 300000 525000
8500 2443750 1700000
Xo=ƐxiLi/Ɛli Ɛli ƐxiLi ƐyiLi
287.5 200
Yo = ƐyiLi/Ɛli Xo=ƐxiLi/Ɛli Yo = ƐyiLi/Ɛli
Company Relocating

There are many factors that contribute to a company relocating.

Some of the reasons include expanding the market and diminishing resources.
For an existing company to relocate, they must weigh their options when planning to relocate
elsewhere.
They can expand their existing facility, add new ones and keep their existing facilities open, move to
another location and shut down one location, or keep things the way they are and not do anything.
Globalization has led many companies to set up operations in other countries.
Two factors that make relocation appealing are advances in technology and trade agreements.
By going global, companies will expand their markets and be able to cut costs in labor,
transportation, and taxes.
They also have gained ideas for new products and services.
IDENTIFYING A COUNTRY, REGION, COMMUNITY AND SITE 

• factors that influence location decisions are:

Manufacturing :
o Availability of energy and water
o Proximity to raw materials
o Transportation cost
Service:
o Traffic patterns
o Proximity to markets
o Location of competitors
Once important factors have been determined, an organization will narrow down alternatives to a
specific geographic region.
These factors that influence location selection are often different depending on whether the firm is
a manufacturing or service firm.
When deciding on a location, mangers must take into account the culture shock employees might
face after a location move.
Culture shock can have a big impact on employees which might affect workers productivity, so it is
important that mangers look at this.
IDENTIFYING A COUNTRY
o A decision maker must understand the benefits and risks as well as the probabilities of them
occurring
v IDENTIFYING A REGION- 4 major considerations

o Location to Raw Materials: The three most important reasons for a firm to locate in a particular
region includes raw materials, perishability, and transportation cost. This often depends on what
business the firm is in.

o Location to Markets: Profit maximizing firms locate near markets that they want to serve as part
of their competitive strategy. A Geographic information system(GIS) is a computer based tools for
collecting, storing, retrieving, and displaying demographic data on maps.

o Labor Factors : Primary considerations include labor availability, wage rates, productivity, attitudes
towards work, and the impact unions may have.

o Other : Climate is sometimes a consideration because bad weather can disrupt operations. Taxes
are also an important factor due to the fact that taxes affect the bottom line in some financial
statements.
Summary :
There are several ways that are very helpful in evaluating location alternatives,
such as locational cost-profit-volume analysis,
factor rating and
the center of gravity method.

First, let’s take a look at Location Cost-Profit-Volume Analysis.

This analysis can be done numerically or graphically. The procedure for locational cost-profit-volume
analysis involves these steps:
1. Determine the fixed and variable costs associated with each location alternative.
2. Plot the total-cost lines for all location alternatives on the same graph.
3. Determine which location will have the lowest total cost for the expected level of output.
Alternatively, determine which location will have the highest profit.
This method assumes the following:
1. Fixed costs are constant for the range of probable output.
2. Variable costs are linear for the range of probable output.
3. The required level of output can be closely estimated.
4. Only one product is involved.

Here’re a couple of important formulas to remember:

Total cost = Fixed cost + Variable cost per unit * Quantity or volume of output
Total profit = Quantity (Revenue per unit – Variable cost per unit) – Fixed cost

In most situations, other factors besides cost must also be considered. We will now consider
another kind of cost often considered in location decisions: transportation costs.
1 https://www.youtube.com/watch?v=AUHtDJIPgTE

Factor rating method

2 https://www.youtube.com/watch?v=r-Z22ddHb_I

Centre of gravity method

3 https://www.youtube.com/watch?v=CObn3c46I3o

Break Even Analysis